Treasury Choice Varies From Bush on Tax Outlook

By JOSEPH KAHN

Published: January 18, 2001

WASHINGTON, Jan. 17 — Treasury Secretary-designate Paul H. O'Neill today struck a cautious note on tax cuts that departed from the position taken by President-elect George W. Bush, calling on Congress to reduce tax rates but expressing doubts that broad cuts would ignite the slowing economy.

In his first public comments since Mr. Bush selected him to head the Treasury Department and serve as the leader of the new administration's economic team, Mr. O'Neill supported tax cuts with words that were noticeably less rousing than Mr. Bush's. He said he favored tax relief because he did not see the harm in lowering the tax burden while the government had big surpluses.

But in a three-hour confirmation hearing in front of the Senate Finance Committee, he did not spell out the benefits of tax cuts in any detail. The former Alcoa executive and Nixon and Ford administration budget expert also cast a shadow of doubt on Mr. Bush's contention that tax cuts are the right antidote to the looming economic downturn.

He said the Federal Reserve, through its control of monetary policy, was the "first line of action" to fight a downturn and suggested that even cuts of the magnitude Mr. Bush has promised would likely have relatively little immediate impact on the nation's economy.

"I'm not going to make a huge case that this is the investment we need to make sure we don't go into a recession," Mr. O'Neill said. "But if we are going to do it anyway, then the sooner the better."

In a friendly but frank exchange on taxes with the Senate majority leader, Trent Lott, who has urged immediate and sweeping tax reductions, Mr. O'Neill dismissed a cut in the capital gains tax, which Mr. Lott has favored, as likely to have minimal stimulatory effects on today's sluggish economy.

Mr. O'Neill also praised the Clinton administration's record of fiscal discipline and economic stability as "wonderful." He said the Bush administration should aim to collect enough in taxes to pay for government operations each year without going into debt — even when the economy barely expands.

"The tax system should be structured so that even with low or no growth, we are not borrowing from our children," Mr. O'Neill said.

That position differs in some respects from the view held by some supply-side economists, who steadfastly defend President Ronald Reagan's tax cuts of the early 1980's as having revolutionized the economy, even if they also contributed to giant budget deficits.

Lawrence B. Lindsey, Mr. Bush's chief economic aide, is a leading proponent of Reagan-era tax cutting and the main architect of Mr. Bush's tax cut plan, which is estimated to cost $1.6 trillion over 10 years.

With Congress so closely divided between the two political parties, Mr. Bush may need every ounce of political support he can get on cutting taxes. Any sense that some senior officials within Mr. Bush's own camp view tax cuts as less urgent than Mr. Bush seems likely to play into the hands of Democrats, many of whom favor smaller reductions in tax rates.

Senator Max Baucus, Democrat of Montana, who headed the committee hearing today, and several other Democrats on the panel argued that while some tax cutting was called for, Mr. Bush's was so large that it threatened to turn projected surpluses into deficits when new spending was factored in.

Several Democrats also argued that tax cuts would almost certainly kick in too late to make much difference in combating the current slowdown.

Mr. O'Neill said he was comfortable with estimates the Bush team had made that projected fiscal surpluses would cover the president- elect's spending plans, Social Security overhaul and tax cuts without creating new deficits.

But if tax cuts sometimes seem like Mr. Bush's economic first love, Mr. O'Neill gave them more of an air kiss. The government has some extra money, he suggested several times, so why not return some to the people.

"It's desirable to have a situation in which we send it back when we don't need it," Mr. O'Neill said of government revenue, adding, "but we should be in balance even with a weak economy."

During the presidential campaign, Mr. Bush made the case that large- scale tax relief was vital despite the seemingly robust economy because it offered "insurance" against a future downturn.

More recently, amid signs that a slowdown has occurred, Mr. Bush has argued that tax cuts have become urgent because they are needed to rescue the economy from a potentially painful slump.

The statements by Mr. O'Neill do not necessarily signal a split within the Bush administration. Mr. O'Neill firmly echoed comments made by his boss when he made clear that Congress would receive tax-cutting legislation within weeks of Mr. Bush taking office. He also left open the possibility that the president-elect will decide to speed up some forms of tax relief to put money in people's pockets sooner.

But Mr. O'Neill does seem likely to let the Fed, run by his friend and former Ford administration colleague Alan Greenspan, take the lead in managing the ups and downs of the economy rather than seeking to have the administration try to influence economic fluctuations with the budget. He also seems more likely than some other members of Mr. Bush's team to argue the case for fiscal caution when the administration debates its economic plans.

His comments illustrate why some conservatives distrust Mr. O'Neill's economic instincts. As a budget official in the Nixon and Ford administrations, he developed a reputation as a pragmatic thinker on fiscal matters, inclined to run a lean and efficient government, but skeptical of ideological extremes.

As the chief executive of Alcoa, the leading aluminum manufacturer, he remained outspoken about public policy and did not always back consensus Republican positions. He fought strongly for deficit reduction during former President George Bush's term and offered crucial business support when Mr. Bush decided to raise taxes at that time, a deeply unpopular decision among conservatives.

Mr. O'Neill has also explored solutions to global warming. He once called for the government to slap a new tax on fuel to reduce energy use and raise new revenue. The latter position directly conflicts with that of the president-elect, and Mr. O'Neill has disavowed it.

His willingness to speak out on such topics has given him the label of maverick.

Mr. O'Neill also jested with senators about his tendencies toward outspokenness today.

During the discussion on taxes, which dominated the relatively breezy hearing, Mr. O'Neill provoked laughter when he said, "I'm thinking about whether I can still get away with being a maverick for a few more days." He quickly added, "I think I will be."

He then responded to a question about the impact of corporate tax cuts on investment, again displaying some skepticism.

"As a businessman I never made an investment decision based on the tax code," he said. "If you give money away I will take it, but good business people don't do things because of inducements."

No senator objected to Mr. O'Neill's qualifications to head the Treasury and his confirmation, expected as early as Saturday, seems assured.

Mr. O'Neill used the hearing to address some uncertainties about his leanings on other economic matters. Currency traders have speculated that his business background will make him more sympathetic to arguments that the dollar is overvalued against other currencies, possibly leading to a departure from the Clinton administration's steadfast strong dollar policy.